Tesla puts industry on notice: EVs can be profitable

May 10, 2013

2013 Nissan LEAF Now in its third model year, the highly innovative, industry leading Nissan LEAF pure electric vehicle features an extensive list of important enhancements for 2013. Importantly, LEAF is now assembled in the United States at Nissan's Smyrna, Tenn. assembly plant, with battery production taking place right next door in the country's largest lithium-ion automotive battery plant. / Wieck

2013 Chevrolet Volt. Picture received May 1, 2013 from General Motors

Tesla's fortunes are tied to its Model S, which runs from $70,000 before tax credits to more than $100,000. / Jane Tyska/Contra Costa Times

Tesla Motors has altered the competitive landscape of the fledgling electric car market.

Not only did its $11-million first-quarter profit shatter the assumption that no automaker can make money selling small numbers of plug-in cars, it posted a 17% gross profit margin, using American workers, in an industry where 10% is considered outstanding.

The outlook for the Palo Alto, Calif.-based startup this week was as bright as the northern California sky.

Founder and CEO Elon Musk reveled as short sellers scramble to cut their losses by buying Tesla shares, which ended the week at $76.76, up 36.3% for the week.

“There’s a tremendous amount of enthusiasm for this car and this company in California, which we don’t see here on the other side of the continent,” said Theodore O’Neill, founder of Connecticut-based Litchfield Hills Research. “How far can Tesla go? As far as they want to go.”

The company sold 4,900 electric cars over the first three months of the year compared with 4,244 Chevrolet Volts and 3,539 Nissan Leafs over the same period. Musk said Tesla’s gross profit margin should increase to 25% by the end of the year.

In contrast, Ford’s first-quarter profit margin in North America hit 11%, a result that both the company and analysts thought was a sign of strength.

“It has many of the elements of a tech stock,” said Jeremy Anwyl, vice chairman of Edmunds.com. “(Investors) are making a bet on Elon. Wall Street was enamored with the cult of personality.”

Still, some analysts question whether Tesla can manage its rapid growth while developing an affordable electric car for the masses.

“We would be skeptical about those claims,” said Cosmin Laslau, a mobile energy analyst for Lux Research. “We don’t think there’s a magical pathway to reduction in lithium-ion costs.”

Competitive car

Tesla’s fortunes are tied to its Model S, which ranges in price from $70,000 before tax credits to more than $100,000. The car can go between 230 and 300 miles between rechargings, depending on the size of the battery pack.

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For the year, Tesla expects to deliver about 21,000 cars., slightly better than its previous guidance of 20,000.

“We haven’t really tried to push volume super hard yet,” Musk said. “I think you have to make sure the house is in order … before you push volume.”

Despite the prolonged promotion of the Chevrolet Volt and Nissan Leaf, Tesla has overtaken very quickly with a much more expensive car. Tesla has no legacy costs from retirees and one factory formerly operated jointly by General Motors and Toyota. Making a profit on sales of about 4,900 vehicles is an impressive feat that raises the bar for any other EVs.

GM plans to introduce the Cadillac ELR, a luxury electric coupe based on the same technology as the Volt, in January or February, Cadillac spokesman David Caldwell said. The Volt starts at $40,000, meaning the ELR could be in the $60,000 range.

“There’s a very interesting opportunity where you have this merger of luxury, provocative design and technology,” Caldwell said. “Cadillac would look at what’s happening (at Tesla) as relatively positive insofar as it proves our notion with ELR, which is that’s where the advanced technology and design is the most attractive for customers.”

GM spokeswoman Michelle Malcho said the automaker does not view the Model S as a competitor to the Volt.

California competitive advantage

The California Air Resources Board’s requirement that 15% of all automakers’ California sales in 2025 must come from zero-emission vehicles has given Tesla a major advantage.

Hybrids and plug-ins that have small gasoline engines don’t qualify for the full amount of credits. Only pure battery-powered cars and hydrogen fuel cell vehicles do.

Because that’s all Tesla intends to produce, the California regulations allow it to sell ZEV credits to others who may need them to comply. Sales from those credits were $68 million in the first quarter, or 12% of Tesla’s revenue.

“This success is not being subsidized by other car companies,” said Stanley Young, spokesman for the California Air Resources Board. “Car manufacturers are not required to purchase credits, nor does ARB establish a price.”

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However, automakers are subject to fines if they don’t meet the board’s standards.

Musk said Tesla will earn a profit without the revenue from ZEV credits during the fourth quarter of this year. Revenue from ZEV credits will drop in the second and third quarter and might be zero by for the last three months of the year, so it’s a short-term gain, he said.

“It’s probably the most complicated scheme relative to credits that exists,” said Shad Balch, spokesman for General Motors. “It’s important so that we have the flexibility while we introduce more plug-ins, hybrids and zero-emission vehicles.”

Critics say the ZEV mandate and credit market is among the most complicated set of regulations they face. But 10 other states, that account for nearly one-third of the nation’s new vehicle sales, are following the same path. These are Connecticut, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont and the District of Columbia.

Honda, long known as a producer of the most fuel-efficient cars in the world, has purchased Zero Emission Vehicle credits from Tesla at least twice in recent years.

“Honda’s position has consistently been that we think regulation should be performance-based, and technology-neutral,” said Robert Bienenfeld, American Honda head of environment and energy strategy. “That’s what we have at the federal level, that’s what we have in Europe, and unfortunately, the ZEV regulation is more prescriptive.”

“We respect their goals, we respect what they are trying to do, but meeting the regulations is very difficult,” Bienenfeld said.